Beacon Roofing Supply Inc. announced that it has entered into a definitive agreement to purchase Allied Building Products Corp. from current owner CRH PLC for $2.625 billion in cash.

Beacon Roofing Supply Inc. announced that it has entered into a
definitive agreement to purchase Allied Building Products Corp. from
current owner CRH PLC for $2.625 billion in cash.

Beacon will finance the acquisition with $2.27 billion of new debt,
including a new $970 million senior secured term loan facility, $1.3
billion in new senior unsecured notes (issued in the name Beacon Escrow
Corp. ), additional borrowings under an upsized $1.3 billion asset-based
lending (ABL) revolving credit facility, issuance of approximately $400
million in perpetual convertible preferred equity to affiliates of
private equity sponsor Clayton Dubilier & Rice LLC (CD&R), and
approximately $345 million of common equity issuance.

We expect Beacon's pro forma leverage for the transaction--prior to
anticipated synergies and including Allied's lease--to be 6.1x (noting
our treatment of Beacon's convertible preferred equity as debt per our
criteria) from the previous 3.4x level at June 30, 2017.

We are affirming our 'BB-' corporate credit rating on Beacon and removing
the rating from CreditWatch with negative implications. The outlook is
negative.

We are also assigning our 'BB+' issue-level and '1' recovery ratings to
Beacon's proposed $970 million senior secured term loan due 2024. In
addition, we are assigning our 'B+' issue-level and '5' recovery ratings
to the company's proposed $1.3 billion senior unsecured notes due 2025.

The negative outlook reflects elevated leverage for the transaction that
is high for the current rating as well as our view of the potential for
risks--including those related to acquisition integration--that could
cause Beacon's leverage to remain elevated for a prolonged period.

At the same time, we assigned our 'BB+' issue-level rating to Beacon's
proposed $970 million senior secured term loan due 2024. The recovery rating
on the senior secured term loan is '1', indicating our expectation for very
high (90%-100%; rounded estimate: 95%) recovery for lenders in the event of a
default.
We also assigned our 'B+' issue-level rating to the Beacon Escrow Corp.'s (a
wholly owned subsidiary of Beacon Roofing Supply Inc., which shall, upon the
consummation of the acquisition of Allied, be merged with and into Beacon with
Beacon as the surviving entity) proposed $1.3 billion senior unsecured notes
due 2025. The recovery rating on the senior unsecured notes is '5', indicating
our expectation for modest (10%-30%; rounded estimate: 15%) recovery for
lenders in the event of a default.
We do not rate Beacon's $1.3 billion ABL due 2023, nor the approximately $400
million of convertible preferred equity.
The 'BB-' rating and negative outlook reflect our expectation that the
proposed transaction will raise Beacon's adjusted leverage--including $270
million of operating leases adjustments and $400 million of convertible
preferred equity, which we treat as debt--to 6.1x from the previous 3.4x at
June 30, 2017.
The negative outlook reflects Beacon's elevated pro forma leverage of
6.1x--which we consider high for the rating--and our view of the potential for
integration risks which could keep Beacon's leverage elevated for a prolonged
periodand put further downward pressure on the rating.
We could lower the rating on Beacon if adjusted debt-to-EBITDA leverage did
not improve to less than 5.5x over the next 12 months. While we maintain a
favorable outlook for home construction and reroofing spending over the next
12 months, the combination of a U.S. housing recovery stall and lack of storm
activity and roof replacements could depress earnings over the next year,
resulting in stagnant leverage metrics. A more likely scenario could be the
company experiencing difficulties integrating its acquisition(s), increasing
operational costs, and EBITDA falling in excess of our forecast, causing
leverage to remain at or above 5.5x.
We could revise the outlook on Beacon to stable over the next 12 months if it
were to realize synergies ahead of expectations and improve leverage metrics
to 5x at the end of its fiscal year ending September 2018. Although we believe
repair and remodeling spending will continue to grow in the mid-single digit
range and improve Beacon's EBITDA and leverage, more impactful earnings—either
by way of enhanced/expedited synergy realization or by high storm
volume--would likely be required to improve leverage to a level more in line
with the current rating.